2021 (12) TMI 1255 - AT - Income Tax

Non-apportionment of expenses in respect of its share with holding company - CIT-A deleted the addition - assessee is a public limited company engaged in the business of merchant banking - HELD THAT - As the assessee had only parted the net profit from the collaboration project with its holding company. We find that the ld. AO had wrongly misunderstood the fact by stating that assessee had only shared the gross revenue and had claimed the entire expenses as deduction in its books. This is factually incorrect. Accordingly, the disallowance of ₹ 3,44,24,282/- ( being 50% of expenses incurred on collaboration project of ₹ 6,88,48,564/-) on account of non-apportionment of expenses is hereby directed to be deleted as the ld. CIT(A) had rightly understood the fact and modus operandi adopted by the assessee. Accordingly, the ground No.1 raised by the Revenue is dismissed. Disallowance on account of apportionment of bad debts - CIT-A deleted the addition - HELD THAT - As categorical factual finding of the ld. CIT(A) has not been controverted by the Revenue before us. Hence, we hold that there is no question of sharing of bad debts written off with the holding company. Once, it is found that assessee had indeed offered the fee income in earlier years in its entirety, any non-realisation of the said fee which resulted in bad debt would be eligible for deduction if the same is written off in the books of accounts. In the instant case a sum of ₹ 1,79,66,908/- remain irrecoverable and the same was duly written off by the assessee in its books in A.Y.2011-12, which becomes squarely eligible for deduction in the hands of the assessee company. There is no question of sharing the same with the holding company. This fact has been duly appreciated by the ld. CIT(A). Accordingly, the ground No.2 raised by the Revenue is dismissed. Disallowance of bonus paid to employees including the key management persons - HELD THAT - Certain employees who have been made Director or Managing Director of specific department inside the company. They are not the Directors of the assessee company as per the Companies Act. The assessee also furnished the list of Directors of the assessee company to justify this contention. Hence, the entire reliance placed on the provisions of Section 40A(2)(b) of the Act was totally unjustified. The ld. CIT(A) also observed that on perusal of the tax audit report, only one person namely Shri Tapasije Mishra, Group CEO, to whom bonus was paid figures in the list of related party transactions, specified u/s.40A(2)(b) - CIT(A) also observed that there is no tax arbitrage involved in the same as the said employee also suffers tax at the maximum marginal rate of 30%. In any case, the disallowance was made by the ld. AO only on an adhoc basis at the rate of 25% without rejection of books of accounts by pointing out some defects thereof. None of these factual observations controverted by the Revenue before us. We hold that the bonus was paid to the employees including the key management personnel only in the ordinary course of business and the same are squarely allowable as deduction u/s. 37 - ground No.3 raised by the Revenue is dismissed.

Summary

Issues:
1. Non-apportionment of expenses with holding company
2. Disallowance on account of apportionment of bad debts to holding company
3. Disallowance of bonus paid to employees, including key management persons

Analysis:

1. Non-apportionment of expenses with holding company:
The Revenue challenged the deletion of non-apportionment of expenses in respect of the share with the holding company. The Appellate Tribunal found that the assessee, a public limited company engaged in merchant banking, had a profit-sharing arrangement with its holding company. The holding company provided services to the assessee, and the revenue and expenses were shared equally. The Tribunal noted that the Assessing Officer misunderstood the arrangement, leading to the incorrect disallowance of expenses. The Tribunal upheld the deletion of the disallowance, as the expenses were appropriately apportioned based on the profit-sharing agreement.

2. Disallowance on account of apportionment of bad debts to holding company:
The Revenue contested the deletion of disallowance on account of apportionment of bad debts to the holding company. The Tribunal observed that the bad debts arose from a project for which the assessee did not share fees with the holding company. The Tribunal found that the assessee had not availed services of the holding company for that specific project. The Tribunal upheld the deletion of the disallowance, emphasizing that the bad debts were rightly written off by the assessee and were not subject to sharing with the holding company.

3. Disallowance of bonus paid to employees, including key management persons:
The Revenue challenged the deletion of the disallowance of bonus paid to employees, including key management persons. The Tribunal noted that the assessee had a bonus policy based on performance and market standards. The Tribunal found that the bonus payments were made in the ordinary course of business and were justified by the performance and contribution of the employees. The Tribunal rejected the adhoc disallowance made by the Assessing Officer, emphasizing that the bonus payments were allowable deductions under Section 37 of the Income Tax Act. The Tribunal dismissed the Revenue's appeal, stating that the bonus payments were legitimate business expenses.

In conclusion, the Appellate Tribunal upheld the decisions of the Commissioner of Income Tax (Appeals) in all three issues raised by the Revenue, dismissing the appeal and affirming the deductions claimed by the assessee.